Where Is The Economic Recovery

CONVOY
February 1, 2016
MONTHLY COMMENTARY
Where is the economic recovery?

I turned 30 a couple months ago, so age has been on my mind. It got me thinking about our global economy, which
like an aging body has failed to respond to the trillions of dollars of central bank stimulus. Back in 2009, many people
predicted a v-shaped recovery and a sharp rise in inflation. Seven years later, we have yet to see a real recovery or
any hint of inflation. Instead, we are again staring into the eyes of deflation and faltering growth across the world.
Recessions arent supposed to last this long when youve got an entire world of central banks rooting for a recovery.
This isnt normal what is going on?
In this commentary I will take a look at the last century in the context of the broader history of humanity and offer a
different perspective. I believe the lukewarm growth we are experiencing is normal; rather, the period of prosperity
in which most of us grew up is likely abnormal and unlikely to repeat in the next century. This idea has implications on
the markets and the portfolio you should hold going into the next century.
The last 60 years saw a population boom that has never occurred before in history and wont occur again in our
lifetimes
Below I show level of global human population from roughly 2 million in 10000 BC to a projected 10 billion in 2100
AD.
Global Human Population Level
1.2E+10
1E+10
8E+09
6E+09
4E+09
2E+09
0
You cant tell much from the graph other than a sharp exponential spike in the last few centuries. Below I show the
annual rate of population growth over this same time frame.
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Global Human Population Year over Year Growth Rate

2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
Human population has grown steadily at roughly 0.05% per year for virtually all of our existence before a huge ramp
up in growth rate in the 1900s. Below I show a zoomed-in chart. Since the World Wars, there has been a far higher
rate of population growth than anything else weve seen historically. Since the early 2000s, the rate of population
growth has been dropping dramatically. Based on virtually all projections, the rate of growth will continue to drop
for the next century towards 0%. In other words, our life time up till now has been extremely abnormal in the
context of broader history and we are now reverting back to the norm.
Global Human Population Year over Year Growth Rate
2.5%
Post war boom
2.0%
1.5%
Today
1.0%
Future
0.5%
WW 1&2
0.0%
1800
1900
2000
2100
Why is population growth important?

An economy can only grow in two ways 1) more people working 2) each person becoming more productive.
Therefore, population growth is half the equation.
Economic growth = population growth + productivity growth
Growing the population by 1% will actually increase GDP by more than 1% because people are interconnected and
there is a multiplier effect. If one additional person makes $100, shell likely spend it and help increase someone
elses salary and they will in turn take their salary and go spend it on their own things (this is called Okuns law).
Below I show an illustration of this in the US. Historically when unemployment goes down by 1% (i.e. working
population goes up by 1%), our real GDP tends to rise by roughly 1.75%. While the exact ratio will be slightly
different across countries, they are reasonably close to the ~2 we observe in the US.

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US Employment vs. Real GDP1

Real GDP
15%
Employment
1%Employment=1.75%RealGDP
10%
6%
4%
2%
0%
5%
-2%
0%
-4%
-6%
-5%
50 55 60 65 70 75 80 85 90 95 00 05 10 15
Based on this observation, we can breakdown how much of the economic growth we observed in the US over the last
60 years came from population growth vs. productivity growth. In the US over the last 60 years, more growth came
from population increases than productivity gains.
1950s
1960s
1970s
1980s
1990s
2000s
2010s
Average
Decomposing US Economic Growth2

Population Unemployment Productivity Real GDP Growth
1.3%
0.1%
2.9%
4.3%
2.6%
0.3%
1.6%
4.5%
2.7%
-0.4%
0.9%
3.2%
1.7%
0.2%
1.2%
3.1%
2.2%
0.2%
0.8%
3.2%
1.4%
-0.7%
1.1%
1.8%
0.5%
1.4%
0.2%
2.1%
1.9%
0.1%
1.3%
3.3%
While the business cycle and unemployment rate is extremely important from year to year, over decades, changes in
unemployment average out and it is the growth of the actual population that matters. The US economy had a robust
3.3% per year real growth over the last 60 years. Roughly 2% came from population growth and 1.3% came from
productivity gains.
A developing country will often see a period of far higher contribution from productivity growth as previously
underutilized and uneducated workers come online. A good example of this is China, which saw both high population
growth and even higher productivity growth over the last half century. However, this high rate of productivity
growth isnt sustainable and the 1.5% number we see in the US is closer to the long term natural rate of productivity
gain for a mature market.3
One interesting side note is that the recent period is the only time where unemployment fell dramatically without a
commiserate rise in real GDP. As I will discuss below, this is because unemployment fell on a shrinking working age population,
thus the total size of the working population didnt increase dramatically.
For the purpose of economic growth, I looked specifically at the change in population aged 15-60, taking into account
demographic changes.
Of course, I wouldnt rule out the possibility of a dramatic technological innovation that redefines everything. However, weve
gone through many world changing inventions like electricity, cars and internet without bucking this trend.
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Decomposing China Economic Growth

Population Productivity Real GDP Growth
1960s
3.8%
-0.7%
3.0%
1970s
4.5%
3.0%
7.5%
1980s
4.8%
4.9%
9.8%
1990s
2.2%
7.8%
10.0%
2000s
2.3%
8.0%
10.3%
2010s*
-0.4%
9.0%
8.6%
Average
3.2%
5.0%
8.2%
What does this mean?
Our world grew tremendously in the last 60 years. This growth rate is abnormal, unsustainable and has already
started reverting down to the long term average in the last decade. We will certainly see an economic boost from
people living and working longer than ever before. We may also see a boost from some yet unknown technological
boost that changes the very structure of our economy. But it indisputable that one of the two legs of economic
expansion, population growth, is disappearing all across the world, which is highly bearish for the global economy, all
else equal. Below I look at the specific regions of the world.
Year over Year Population Growth for Ages 15-60
United States of America
2.0%
1.5%
1.0%
Historical Economic Boost from Population: 1.9%

Current Economic Boost from Population: 0.2%
0.5%
0.0%
51
63
75
87
99
11
The population of 15-60 year olds grew dramatically in the 50s with maturing Baby Boomers and started falling
sharply in the 2000s as they began to retire. The US is currently at close to 0% growth rate of 15-60 year olds.

Japan
3.0%
2.0%
1.0%
0.0%
-1.0%

Current Economic Boost from Population: -1.3%
-2.0%
51
63
75
87
99
11

4
Japan is the classic example of a shrinking, aging population. Their population growth dipped negative in the 90s
right as their lost decades began.
Europe
1.5%
1.0%
0.5%
0.0%
-0.5%

-1.0%
51
63
75
87
99
11
The population in Europe has also been falling sharply and it is now in a similar boat as Japan. The future projection
of Europe is bleak.
China
4.0%
3.0%
2.0%
1.0%
0.0%

-1.0%
51
63
75
87
99
11
China has also recently dipped negative in population growth of 15-60 year olds largely due to the delayed effects of
the One Child Policy. You can see why China recently reversed that policy. The benefits of high population growth
and increased productivity are both fading in China. Reversal of the One Child Policy will need decades to take
effect. I am bearish on the growth of Chinas economy over the next decade4.
These numbers are super rough, so it is likely coincidence, but it is interesting to note that Chinas population growth dipped
into the negative territory in 2011, right around when our current commodities slump began.
5

Africa
3.5%
3.0%
2.5%
2.0%
1.5%

1.0%
0.5%
0.0%
51
63
75
87
99
11
India
3.0%
2.5%
2.0%
1.5%
1.0%

0.5%
0.0%
51
63
75
87
99
11
I believe Africa and India will be next growth engines of the world as they are best positioned to maintain their high
rate of population growth. Below I show the same chart at a global level. Historically weve gotten 3% a year in GDP
growth from an expanding population. Now we only get half of that and it is set to shrink. The world is struggling and
will likely continue to struggle to find growth and inflation.
World
3.0%
2.5%
2.0%
1.5%
1.0%

0.5%
0.0%
51
63
75
87
99
11
Much like a glacier, population demographics move slowly and predictably. As a result, we can fairly accurately
predict the future of the global population. Below I show the implied impact of population and demographics change
on economies over the next 40 years. Of course each economy will have its own intricacies and population growth is
but one driver of the economy, but I believe this provides a rough road map.

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Impact of Demographics and Population Change (Age 15-60) on Real GDP

1950-Now Now
2020
2030
2040
2050
United States
1.9%
0.2%
0.3%
0.3%
0.4%
0.2%
China*
2.9%
-0.6%
-0.1%
-1.1%
-0.7%
-2.6%
Japan
1.0%
-1.3%
-1.2%
-1.3%
-1.3%
-0.8%
India
3.6%
2.7%
2.2%
0.7%
0.4%
0.1%
Europe
0.7%
-1.3%
-1.0%
-0.5%
-0.7%
-0.7%
Africa
4.5%
4.8%
4.6%
2.4%
2.0%
1.7%
Asia
3.4%
1.4%
1.3%
0.2%
0.0%
-0.6%
World
3.1%
1.6%
1.6%
0.5%
0.4%
0.0%
*This is based on a World Bank analysis done in 2014 so it doesn't include the recent lift on the one child policy
US will continue its positive, close to zero population growth rates into the foreseeable future. We should continue
to expect ~2% growth, rather than the 3-4% weve seen historically. China will experience a dramatic change as they
dip into the negatives for at least the next two decades before the effects of the lift on One Child Policy kicks in.
Japan has been and will continue to feel the pain of an aging and shrinking population. Europe joins Japan and will
likely lose their next few decades. India and Africa are the last frontiers and best positioned to grow economically.
Globally, the rate of population growth will continue to slow until we get close to almost 0% growth in 2050.
I believe it is no coincidence that a period of unprecedented rising global inflation and interest rates came right at
the tail end of a period of unparalleled global population growth. Since the 80s, as population growth slowed,
inflation fell and the economy required lower and lower interest rates to stimulate the same level of high growth
weve become used to.
Global Population Growth
US Inflation Rate
2.5%
2.0%
1.5%
1.0%
47
59
71
83
95
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
07
Implications of an aging/slowing population on the markets and portfolio.

I believe most peoples perception of what is normal may be skewed by the US financial markets over the last
century. We have been fortunate to live in a country that rose from the ashes of the World Wars to become the
dominant economic and military world superpower during a time of unprecedented global growth. Going forward, I
believe we need to adjust our expectations of growth down from 3-4% closer to ~2%.
Slowing economic and population growth will likely mean persistently lower inflation rates as weve seen in the last
5 years. Deflation is something central banks across the world will continue to struggle against in much the way the
Bank of Japan struggled in the last few decades. Europe is now commencing a similar struggle. The main difference
at the global level is that we will unlikely see a coordinated series of actions from every central bank; instead well
see each bank do enough to address the issue at home and push deflation elsewhere, much as they have been doing.
7
This will mean currency and trade wars. I believe there is a good probability we never experience high global
inflation again in our lifetime.
Unless the central banks across the world dramatically change their current stance, lower growth and inflation will
put downward pressure on bond yields with regions like Europe, Japan and China feeling the greatest need to
devalue their currency and lower their yields.
Stocks were the clear winner in the growth happy 20th century, but I am much less certain about the ability of stocks
to carry a portfolio on its own in the 21st century. In an environment of persistently low growth, I think a more even
balance of debt and equity is advisable.
With lower growth and interest rates, I think the expected return of all assets and portfolios will be lower. Gone are
the days when you can buy virtually anything in the world and be assured of a high single digit long term return. A
world of lower and uncertain upsides means it is more important than ever to lower the fixed costs of investing
management fees, taxes, trading costs and concentration risks.

8
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Where Is The Economic Recovery

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CONVOY

Where is the economic recovery?

Convoy Investments LLC | www.convoyinvestments.com | (302) 3193659

CONFIDENTIAL: DO NOT DISTRIBUTE

Global Human Population Year over Year Growth Rate

Post war boom

Why is population growth important?

Convoy Investments LLC | www.convoyinvestments.com | (302) 3193659

CONFIDENTIAL: DO NOT DISTRIBUTE

US Employment vs. Real GDP1

Decomposing US Economic Growth2

CONFIDENTIAL: DO NOT DISTRIBUTE

Decomposing China Economic Growth

Historical Economic Boost from Population: 1.9%

Year over Year Population Growth for Ages 15-60

Historical Economic Boost from Population: 1.0%

Convoy Investments LLC | www.convoyinvestments.com | (302) 3193659

CONFIDENTIAL: DO NOT DISTRIBUTE

Historical Economic Boost from Population: 0.7%

Historical Economic Boost from Population: 2.9%

CONFIDENTIAL: DO NOT DISTRIBUTE

Year over Year Population Growth for Ages 15-60

Historical Economic Boost from Population: 4.5%

Historical Economic Boost from Population: 3.6%

Historical Economic Boost from Population: 3.1%

Convoy Investments LLC | www.convoyinvestments.com | (302) 3193659

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Impact of Demographics and Population Change (Age 15-60) on Real GDP

Implications of an aging/slowing population on the markets and portfolio.

CONFIDENTIAL: DO NOT DISTRIBUTE

Convoy Investments LLC | www.convoyinvestments.com | (302) 3193659

CONFIDENTIAL: DO NOT DISTRIBUTE

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